The best strategy for not having to fire your co-founders is to not bring them on board in the first place.

One of the most common early-stage startup mistakes is building a weak founding teams. Since a good team is often the closest you can get to a good business plan, this one anti-pattern is the cause of many company failures. Before we dig into why this happens so frequently and what entrepreneurs can do about it, I want to share one of the formative stories from my early days as a VC.

An entrepreneur who should have fired his co-founders

Many years ago, I met a 20-something technical founder who had recently left graduate school with interesting technology in the enterprise search and knowledge management market. Beyond his compelling personality and the technology, he had an impressive approach that allowed him to deliver benefits to users without prior user setup or explicit user actions, using desktop and email client integration. To use a current analogy, it was like Xobni but better.

A week later, he came to Polaris with his founding team. He had three co-founders. They all had grey hair and so-so backgrounds. Over the course of an hour, I learned one of the three was a relative who, after hearing about the idea, pushed himself onto the team as “the business guy” and then promptly brought in a couple of former co-workers as co-founders. The net effect was that a backable founder had become essentially unfundable. I passed on the deal. As expected, the company went nowhere. I am friends with the founder and would like to back him some day.

This is an extreme example, but it underscores the randomness by which founding teams are created. Three disclaimers before we dive into the issues:

I’m not advocating that an entrepreneur goes it alone. Much has been written about the costs and benefits of partners when starting a company. I’m advocating for more thoughtfulness about the building of a founding team and more creativity around how to make progress with limited resources. See Venture Hacks’ post on How to pick a co-founder.

I’m not advocating that what’s best for the company in an abstract sense should trump personal relationships or commitments that have been made. I am advocating for greater care in making commitments and more openness around the balance between business and personal spheres.

I’m focusing specifically on founding teams here, but many of the lessons apply equally well to hiring in very early stage companies (before product/market fit has been proven).

How weak teams get built

Arrogance and ignorance, in small doses, are powerful tools that help entrepreneurs focus and execute against overwhelming odds. In larger doses they make a dangerous poison that kills startups. In most cases, they are the root cause behind weak founding teams.

It’s no secret that startup business plans tend to evolve over time, sometimes substantially. Yet, at any given point along that evolutionary path, many entrepreneurs are over-confident that, this time, the plan will succeed. Then they look at the founding team and, if they think they are missing a key role, they may bring a co-founder on board. This process repeats itself up to the point where either the company converges to what it will likely end up doing in the next few months or the founding team gets to a size that makes additions practically impossible.

I recently met an entrepreneur who started working on a consumer social media idea about a year ago. Thinking he was building a small dot-com, he brought on a college buddy who had done Amazon Web Services work as a chief technical officer (CTO). In a few months, the idea shifted toward working with agencies. He brought in a VP of marketing from the agency space, because he was confident that was where the opportunity was. After a few more months, the team realized there was only a services business in the agency space. Now they are pivoting towards expert identification/collaboration in enterprises, and neither his CTO nor his VPM is right for the team.

The entrepreneur in this example is a smart guy. But he didn’t have enough experience to understand what would be required for a co-founder role over the early evolutionary path of the company. He didn’t fully appreciate the opportunity cost of making these early hires given his limited recruiting network and the pre-product, pre-funding stage of the company. Further, he did not know how to evaluate a VP of marketing. He ended up with a communications-oriented exec who — beyond lacking understanding of the enterprise domain — is not very helpful in general with product marketing issues. This is how ignorance hurts.

What VCs think about bad co-founders

Keep in mind that when you recruit or you pitch investors, they don’t get the benefit of the history that might explain your decisions. Let’s imagine what goes on in a VC’s head:

“Shoot, this is a backable entrepreneur and the idea may have legs but the two other founders are B players and a poor fit for the company at this point. I could talk to the lead founder, but I don’t know about the personal relationships on the team and this can backfire. Also, I don’t want word getting out that I break founding teams. This can hurt my dealflow. Anyway, the CEO showed poor judgment in bringing these people on board. Also, there is still a lot of recruiting work to do whether the team changes happen before or after an investment. Frustrating… this could have been a good seed deal. Now it’s too complicated. I’ll pass using some polite non-reason.”

Agile founding teams

There is a principle in agile development that centers on minimizing wasted effort. One of the cornerstone strategies — supposedly one of Toyota’s rules, too — is to delay decisions until the last responsible moment. Because the future is uncertain, the idea is to make decisions with the most information.The emphasis is on “responsible,” because a lot of procrastination is bad too.

Last week, I wrote about how to raise money without lying to investors with this same principle. The logic also applies to building strong founding teams. Because you don’t know what your startup will end up doing, it can be a big mistake to hire the best people for thispoint in the company’s life.

Entrepreneurs Anonymous

My company, especially pre-product and pre-funding, may not be very attractive.

I may not be the best person to evaluate people in _______ and _______.

Ten rules for building agile founding teams

Here are some specific strategies for building founding teams. There are no silver bullets. Some of the advice is contradictory and situation-specific. Caveat entrepreneur.

Network, network, network. Learn how to learn through people. It’s the fastest way to understand a new domain. Value negative feedback. It often carries more information than a pat on the back. Expand your recruiting network, so you get access to better talent.

Set clear expectations. When getting involved with someone, establish the right psychological contract from the beginning. Talk about what might happen if there is a pivot in an unexpected direction.

Go easy on titles. Don’t give out big titles unless you have to and, even then, question why you have to. You can always “upgrade” someone’s title later if they perform well. They’ll appreciate it. On the flip side, big titles can cause many problems when you recruit or raise money.

Structure agreements well. Founders should have vesting schedules with some up-front acceleration. In some cases, you can bestow founding status without giving founding equity with accelerated vesting.

Be honest with and about your team. Get in the habit of discussing team fit with the business plan in an open, non-threatening manner.When you talk to experienced investors or advisors, be honest about the limitations of your team. Most likely they see any warts just as well or better than you, and you can only win by showing you have a firm grip on reality.

Hire generalists early. Hire specialists later.

Hire full-timers reluctantly. You can only have a few of them in the early days, whether they are co-founders or not. Be picky. Don’t fall for the chimera of “If only I hire a __________, then I can _________.” This may be true, but only if the person you hire is perceived to be good and does a good job. The perception of the quality of your team is as important as reality for recruiting and fundraising.

Find experienced part-timers. Sometimes you can get a lot of value out of very experienced people even if they only spend a few hours, or a day, each week with you. The key is to do this over a period of time and build context. Over time, experienced part-time employees can help in the process of building the company. They can help make many decisions — for example, around team-building, financing and the business plan — as opposed to any one decision. This is how I work with startups through FastIgnite. Depending on the situation, I’m an active advisor or co-founder and/or acting CTO. Other people, like Andy Palmer, take on a board or acting CEO role.

Find the right investors. Seek investors who pride themselves on their recruiting abilities and have a track record of helping startups build teams. These investors may see the holes in your team as an opportunity instead of a problem, as long as they feel confident the company is a good recruiting target. Some firms have internal recruiting teams led by experienced former executive recruiters. Examples include Benchmark (David Beirne) and Polaris (Peter Flint). Others, such as General Catalyst and Founders Fund, favor partners who are former entrepreneurs with deep networks and team-building experience.

Fire your co-founders. If you are behind the 8-ball and see your team as a key constraint, you should do something about it. Don’t wait for an investor or someone else to do it for you. The non-CEO co-founders can fire their CEO co-founder, too (or change their role and level of responsibility). This happened at a social commerce startup in the Bay Area I liked. The CEO came up with the idea (kudos to him) but he had enterprise background and provided little value-add. His two co-founders were responsible for most of the progress. It took them too long to reshuffle things. By that point, they’d made a bad impression in front of too many investors. The team fell apart eventually.

If you successfully apply these strategies, you stand a better chance of going after the right people at the right time and bringing top talent on board.

I had an issue with a co-founder who was not quality, never wanted him on board but my 3rd co-founder did. I knew the guy I didn’t like wouldn’t last and we created a agreement that would leave him nothing if he left. Sure enough the guy I didn’t like left in less then a year and owned almost nothing in the company.

Since his departure we have hit many milestones and built the team we needed. Made mistakes along the way but got rid of those mistakes quickly. Just go with your gut on these decisions and you will see that the outcome is almost always for the best. Fire slackers early and learn from your hiring mistakes.

We vested every six months but bought most of his vested shares at a very low valuation, as was written in our agreement. When founders leave in the first year (or are forced out) they don’t see much value to their shares so doing an exit deal is fairly easy.

I think all the points you made are true and very valid. However, I would like to bring in elements of human nature that makes all of this very difficult, and some of it downright impossible.

When you work at the beginning of a startup, it’s ridiculously hard and uncertain. And one of the best ways to overcome uncertainty is to get the approval of other people. And what better way to get that than to get someone to be a co-founder with you, and to support your idea full force? In a case where your realistic odds of succeeding to any degree are next to zero, the fact that someone believes in your idea so much that they’ll join it is huge, and while it might not be right in the long term, it helps confidence big time in the short term.

The other point I’d like to make is that even big organizations with well-developed hiring standards and smart HR departments make dumb decisions in hiring ALL the time. In fact, it could be argued that more hires are bad decisions than good ones – and that’s ok, since the good ones add a lot and the bad ones can be gotten rid off. But the opportunity cost of adding someone to the team of a startup is huge — you’re hiring one person rather than a hundred. And so making that crucial mistake is supremely easy, and highly luck based.

Still, I think your article provides A LOT of great insight to entrepreneurs, and should be considered carefully. While the pitfalls are many and the luck factor is higher than we want to admit, anything we can do to influence that factor (like following the 10 rules you outlined above), is an awesome thing.

Human nature plays a huge role. For example, in my experience, many technical founders are perfectly happy to pound the table about a minor technical issue but become extremely conflict-avoidant when it gets to people-related issues. That doesn’t help matters here.

Let’s also not forget that startup teams don’t exist in isolation. Team members have personal lives. Many have families and kids. The interconnections on the founding team can span multiple spheres that makes doing the right thing very hard sometimes.

Good question. A lot depends on how agreements are currently structured. It can get pretty complicated in many cases, so you should seek legal advice if that’s the case. The best rule is to try to create a win-win situation by finding a way to have the founder leave for good reasons that he/she understands and is comfortable with, at least to a point.

Sometimes the reason a startup has an overwhelming likelihood of failure is so clear and so time-tested that you wonder how the people inside it don’t see that or why they don’t act on it. And unfortunately, many times — as it was the case then for me — it is not in the observers’ best interests to bring the issue up. Many other VCs met with the company. The founder later told me none brought the team issue up.

The term “founder” has built into it BOTH notions; the desirable one (noun form) as well as the less desirable notions the verb form connotes:

founder (noun) — a person who founds or establishes.

founder (verb)
1. (of a ship, boat, etc.) to fill with water and sink.
2. to fall or sink down, as buildings, ground, etc.: Built on a former lake bed, the building has foundered nearly ten feet.
3. to become wrecked; fail utterly: The project foundered because public support was lacking.
4. to stumble, break down, or go lame, as a horse: His mount foundered on the rocky path.

Great post. Can you please provide more depth behind the following point (especially the last sentence):

4. Structure agreements well. Founders should have vesting schedules with some up-front acceleration. In some cases, you can bestow founding status without giving founding equity with accelerated vesting.

Many founders (especially in the Boston area I’m in) tend to huddle in their small circles and seem to be afraid to venture outside of their social group comfort zone. This leads to stale networks and lost opportunities.

One my most painful and expensive experiences was getting into a venture where the co-founders were not willing to pivot. “Perseverance” is the term that was most used, even when the market was saying “we don’t want your stuff.”

Also, one must also be wary of joining any venture where one or several of the co-founders are unfireable or undemotable. Entitlement to being indispensable leads to hubris, arrogance, and failure.

Very accurate analysis. I only wish you had mentioned one of my favorite attributes of anyone — founder, employee, or just average day-to-day person: The ability to identify one’s own faults or weaknesses.

In an (impossibly) ideal world, co-founders would fire themselves, having recognized that the company (and their own investment in the company) can grow faster without them.

The best structure for an operating agreement would be to emphasize and encourage this sort of behavior by not punishing someone too badly for withdrawing from the company with the consent of his/her co-founders.

Do you agree with this approach? How would you structure an agreement to reward this sort of behavior?

Introspection is very valuable. For example, boards love the CEOs who figure out they’ve hit their ceiling and go out to find their replacements as opposed to forcing the board to do the work.

As for founders firing themselves, that’s not hard. 😉 Are you suggesting the company should give them something above and beyond their compensation up to that point as a reward for that type of behavior?

Absolutely, “fire them and try again” can be a death blow for many startups simply because the loss of momentum, money, etc. is too much. That can also be the case whenever a startup has a big focus shift, regardless of co-principal issues.

The core problem I see in both of those situations is often related to the founder(s) attempting to grow before there is a clear vision and strategic plan. “Unguided missile” is the term often used in our office…”they are going somewhere fast, we just aren’t sure where.”

Nonetheless, I also see a lot of leadership groups that are weak simply because they contain guys that just happened to be at lunch the day Newco was being discussed. That, and other similar problems, can be avoided if the original founder(s) will think more critically about why each person is being added to the team.

I do wholeheartedly agree that adding generalists early on is a safer strategy than adding a one-trick pony, for obvious reasons, but I don’t see that being a problem anywhere near as often as the first two.

Of course, as a lawyer, I am partial to the power of good, flexible documents, too.

Great post. Not enough experienced entrepreneurs write about picking early co-founders and employees. I disagree with the title a bit, although not the point you are making — you can never truly fire a co-founder. You can get them to leave the company and stop paying them, or negotiate a reduced role for them, or get them to leave on good terms, all of which could be considered firing in some sense, but they’ll still be the person you started the company with — you can’t just hire a new co-founder six months into the company’s life. It’s not a title you can give out in the same way you can give an executive title. But this only strengthens the importance of getting it right the first time, by instinct, luck, or (ideally) because of good guidance and analysis in addition to those.

Does anyone have insight into taking care of business with a co-founder (highly respected in the industry, etc.) that is not performing even close to the level of junior employees? (reasons notwithstanding). I am a co-founder & CEO, but am unsure of how to take care of business here (other than the obvious “sack”).

Okay, so he knows he’s doing a bad job. Have you talked about this openly together? How does the conversation go?

The key is to understand why he’s staying in the job as opposed to leaving. Is it that he’s greedily trying to vest more? Or that he needs the salary? Has he made money before? Can he get a cool job or start something new easily?

One scenario I’ve seen a number of times is execs who are in over their head but feel like they can’t quit because they’ll disappoint others. The key to helping them is getting the message through that everyone is better off when they play to their strengths and that it’s okay to try something hard and discover that you either don’t like it or you are not good at it for other reasons. To the execs in question, the possibility that they can do something else they like more or leave with their chin up can be a huge load off their shoulders.

If having this conversation in the comments is uncomfortable or slow, shoot me an e-mail. Contact info is here.

As usual you have a lot of great pointers for founders in search of founders. One thing I have noted on several occasions is that founders tend to be very generous. They assume that the people they bring on board will do everything they say they are going to do and will be every bit as enthusiastic as the founders are. So I try to make this point to my early stage clients: Know thy co-founders very very well before they become co-founders. Discovering something unfortunate about your brand-new co-founder after you bring him or her on board can be the end of your new enterprise. And, if cleanliness is next to Godliness, vesting is next to that. I can’t tell you how many clients have come to me asking how to get that 25% back from Harry (or Sally) because he (or she) didn’t do what they promised.

We’ve been thinking about using this schedule to align incentives and scope risk for us in recruiting a serial startup COO/CFO cofounder whose value we believe largely lies in our initial financing (hopefully without VC, and with some of his own money), operations, and eventual exit (he’s managed successful IPO and acquisition exits at his previous venture-backed startups), at 15% equity. While it’s a lot to ask to hang half one’s equity out there until exit, 15% also seems a lot even for an experienced COO…

Whether 15% is above or below market depends on many things, including geography and stage. How much have you raised so far? How much has the company accomplished?

You can always build milestones in a vesting schedule. The hard part is making the milestones relevant given an uncertain future or you might find yourself in a situation where the person is optimizing for achieving the milestone that was set two years ago and not doing what’s best for the company at the moment.

As for Basil’s vesting schedule, I think it’s angel investor-friendly and not necessarily entrepreneur-friendly. His claim that 50% of the value can be generated by a well-planned exit is true for small companies. Hard to make the same argument for larger companies.

Unorthodox? I think a better way to look at it is “Fair and Equitable.” The group dynamics between a team of tech company founders is incredibly complex. People are not static — they evolve — often quickly in our 20s and 30s. In my opinion, a fundamentally fair vesting formula and a well-considered equity structure will increase a startup’s probability of success by at least 50%. Great post and comments. Keep up the excellent blogging — it’s important.

Great post and discussion above. I think co-founders often structure things in a somewhat arbitrary way out of a sense of egalitarianism: After dividing up the equity pie based on some sense of the relative contribution each co-founder brings to the table, either everyone gets issued fully-vested founders’ shares (until the VCs come along and impose a stock restriction agreement) or every co-founder agrees to an identical vesting schedule for all or a portion of their shares. While that may seem fair on a gut level, I encourage entrepreneurs to fully think through what items of value each founder has contributed to the startup already, will contribute in the immediate future, and is expected to contribute in the long term.

Sometimes it may make sense to give one person a sizable chunk of stock that is already vested if he or she did the lion’s share of the work developing the product before the startup was even incorporated — particularly if that person may not be a keeper as the company grows and matures. These can be uncomfortable conversations to have; a good analogy is estate planning, where the best lawyers are able to gently guide their clients through all of the “what-if” scenarios and build them into the documents. It may be awkward, but it sure beats probate.

Unless a team of potential founders has previously worked together in one or more successful startups with a demonstrated ability to work well together and execute, the risks that they won’t gel will be higher for both the company and potential investors, especially with the demands and pressures of a startup. Assuming a founder can either self-fund or access sufficient seed capital, I contend they would be better off laser focusing on rapidly getting a beta version built, testing the product with potential users, and validating that real customers are willing to pay for the product/service.

Startup costs have never been lower and a founder can hire the necessary talent on a contract/temp basis until the company can demonstrate product and business model viability. With some initial validation versus just an unproven concept, they will have a more compelling, lower risk opportunity to help them attract top talent and investors. Plus, they can assess the contract talents’ abilities and fit without a co-founder level commitment. If they aren’t a good match, then the founder can pursue other talent with minimal cost & hassle.

If the company does plan to raise capital, a validated concept with interested customers is a lot more attractive to investors than an unproven idea with a full team of expensive founders. Keeping the burn rate to a minimum, running a lean operation, and delivering initial results with minimal capital will further increase their fundability. Yes, some investors will only invest if there is a proven team already in place, but if the business plan does morph into a new direction and the team doesn’t have the right skills, they have a much bigger problem.

They will have a better chance at success by adding management and staff when absolutely needed to meet company growth rather than building out a full team, then struggling to generate sufficient cash flow to cover the higher burn rate. Yes, it means more work and longer hours initially but unless the founders have a real passion and commitment to the business, they probably would be better off not pursuing it in the first place.

Tom, founders usually get restricted stock and not stock options. What happens is that the company repurchases the unvested shares from the founder for a pre-agreed, usually insignificant amount per share. In other words, the founder who leaves loses the unvested shares.

Hi- this is a great post, I just started a company and have been working with two really great techie’s ( I was a techie before and sold a company also, but that was with a different team). Both the tech guys have known each other for a long time and one out of them is a cofounder ( 30%) I own the rest 70%. As someone who does BD/Marketing and sales for the company am usually out of the town and travelling. Whenever I come back I just feel like I am completely not wanted in the company and anything I say with respect to discussing future growth and the lack of product release is looked down upon. We are at the brink of raising our first round of capital, but am not very happy with my role in the company and have a feeling that I will keep feeling the same as the company becomes larger because we are such a tech intensive company. I think our company has great potential and am really excited about what we do, but for me its also important that I am happy with the people I work with. I have talked to them about leaving the company but they panicked and forced me to stay. I just am not feeling it anymore. I really do want to just quit and let them run the company to the best of their abilities..Do you think I should wait to raise a round of capital so that they have some money to work with or will that create any issues with the investors. I dont care about stock because am 100% sure I can build a more successful company anytime, I just want to enjoy doing that. We are all in our early 20’s so am sure we have a long way to go.

Hi Sim,
You talk about weak founders that are chosen by the primary founder/entrepreneur. Have you ever seen a situation where weak additional founders are forced onto an entrepreneur by a VC in a very early stage startup? In this case the area of weakness may be different – they probably have great skills and experience in some areas, likely have had one or two successful exits, but might not really be in tune at all with the entrepreneur’s vision or goals, ultimately distracting the true founders from delivering on their first milestone.